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Big Oil Likely to Return to Iraq

With only one contract signed last week, Iraq will need changes at its next bidding session.

I suppose it depends upon whom you speak to. If you talk to the management of almost any of the big Western oil companies that participated in the Iraq oil field auction last week, the event was a disaster. However, Iraqi officials expressed pleasure with its outcome, even though only one contract was awarded for one of the six oil fields and neither of the two gas fields that were on the block.

But something tells me that the fact that the Iraqis have moved up the next round of bids from December to an as-yet-undisclosed earlier date may indicate that they were less enthralled by the first round than they're attempting to let on.

Nevertheless, the lone approved contract went to a group led by BP(NYSE:BP). That team will work on the Rumaila field; it's Iraq's largest, located in the southern part of the country. That team was able to walk away with a pact only by cutting its bid in half from $3.99 a barrel to $2.00. The companies will be paid on the basis of the amount of production they're able to add to the field. ExxonMobil(NYSE:XOM) bid $4.80 a barrel for the same field.

So now the focus will turn to the next round of bids. It will differ from the first effort in that most of the fields involved are either completely undeveloped or have only been somewhat developed. It's still unknown whether the five fields left from the first round will be included in the next session.

What is clear -- or at least likely -- is that BP and its partners will need to fork over somewhere in the $15 billion to $20 billion range to shape up Rumaila. But given what they’ll be receiving from the locals, their economics will be tight. On that basis, perhaps the likes ofRoyal Dutch Shell(NYSE:RDS-A), Lukoil (Pink Sheets: LUKOY.PK), ConocoPhillips(NYSE:COP) and Eni(NYSE:E), all of which walked away without deals, did themselves a favor.

Nevertheless, something tells me that a host of big companies will return to Baghdad for the next round, whenever it occurs. For instance, China's CNOOC(NYSE:CEO) is already expressing interest in doing so.

And at this point I also wouldn't criticize BP for stretching for a deal. It's called getting your foot in the door of a country with an estimated 115 billion barrels of oil.